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Many people become entrepreneurs because they don't feel they're
getting paid enough for the work they do in the corporate world.
Ironically, they may find themselves even lower on the salary scale when
they open their own business.

"They've made hundreds of thousands, even millions, for people,
and just made a salary, so they go into business for themselves,"
says Jack Chapman, author of Negotiating Your Salary: How to
Make $1,000 a Minute (Ten Speed Press, 1987), now in its 7th
edition. "But then it becomes difficult to know how much to take
out of the business, especially in the early days."

When trying to figure out your salary, consider how much your
time is worth, whether it's a good time to take money out of
the business, and whether there are alternative ways of making
ends meet for now. These 10 questions can help you settle on the
right amount for you and your business:

What do other people in top management
make?
Chapman says you can find some pay parameters by checking out
various online sites to see how much other executives are being
paid. He recommends Salary.com, which gets its data from
larger corporations, PayScale.com, whose information comes from
the executives themselves, and Glassdoor.com, a free jobs and career
community that includes employee-generated content. "While
these sites are not targeted to entrepreneurs," he says, "you
can find a business similar to yours, see what people are
getting paid, and use it as a benchmark for what to pay
yourself."

How will other employees react to my
salary?
Startups, often strapped for cash, sometimes attract and retain
key employees by offering them equity and other types of non-cash
compensation. If that's the case for you, your employees may
react negatively if you collect a fat paycheck. Employees -- and
investors -- expect the founder or founders to apply the same
compensation policies to themselves, says Joan Farre-Mensa,
assistant professor of business administration at Harvard
Business School. "If the entrepreneur is drawing a big salary,
this can be interpreted as lack of confidence in the future
prospects of the company, negatively affecting employee morale."

How many jobs am I doing?
If you're acting as CEO, purchasing agent, salesperson and social
marketer, you deserve to be paid for those jobs, or at least a
portion of what it would cost to hire people for those jobs,
Chapman says. "If say you're doing jobs that would cost you
$250,000 to hire out, you might keep 50 percent of that for
yourself -- if the business can handle it."

What is my cash flow, now and in the
future?
Your salary will, of course, depend on cash flow -- not only
current cash flow, but even more important, future cash flow,
says Steve Trojan, a CPA who specializes in small businesses at
SMT & Associates, an accounting firm in Crystal Lake, Ill. He
recommends that before starting a business, you develop financial
projections to help understand how much cash flow will be
generated over time, how much will be needed to expand the
business, and how much might be available for your personal
expenses. This will help you understand how much money you should
set aside for living expenses before starting the business and
whether you might need a part-time job in the early stages of
your startup.

What does my company's growth rate allow me to take in
salary?
If a company is growing rapidly, you need to put any profits in
the business and limit your salary. If you have a $3 million
business that's poised to become a $6 million business, it needs
every bit of the capital it's generating. "Growing businesses are
generally cash flow neutral or negative during their formative
stages, and as a result, there's no cash to take out," says
Douglass Tatum, associate professor at Middle Tennessee State
University. "The entrepreneur has to reinvest into the business."

Can my family afford to live on a small paycheck -- or
even no salary?
Young entrepreneurs with no dependents can more easily limit
their living expenses than those with children or other
dependents, Farre-Mensa says. This is why many first-time
entrepreneurs choose to start their businesses when they have
fewer responsibilities. But if you happen to be an entrepreneur
with dependents, make sure that your co-founders and early
employees understand your circumstances and don't interpret your
salary as a lack of commitment to the company.

Can I receive some of my compensation in a form other
than salary?
Once the business is on its feet and the owner is able to start
taking money from the business, the structure of these payments
can be important from a tax perspective. If during the startup
days, the owner loaned the company money for working capital, he
can start to pay himself back when cash flow allows, Trojan says.
"Making payments to owners via shareholder distributions -- if
the company is an S-corporation -- also can reduce taxes, but you
have to be mindful of the IRS requirements that active owners
must take a reasonable salary." While the IRS has not defined
"reasonable compensation," a common definition is a wage you
would pay another person for the job you are performing, he says.

Should part of my salary be based on the distribution
that other investors share?
There can be some serious conflicts with investors and
shareholders over compensation, but these issues can be minimized
if a significant portion of the entrepreneur's cash compensation
is based on the company's performance, Tatum says. If the company
has professional investors, they're going to make sure the
compensation plan rewards the founder's performance
appropriately, with anything leftover going back to the
investors. If the investors are friends and family, they should
be given the same courtesy, Tatum says. "In other words, treat
them as if they had appropriately negotiated their investment
positions as professionals. This could significantly reduce some
of the tensions around the issue of compensation. This is a good
idea even if the investors are unsophisticated and have not
pushed the issue with the entrepreneur."

Do tax considerations enter into my
compensation?
Tax evasion is obviously illegal, but tax avoidance is good
business, Tatum says. A good tax advisor can develop ways for an
entrepreneur to increase or defer compensation in a tax favorable
manner. Be sure to consult with a tax expert sooner than later,
Tatum says. "More times than not, an entrepreneur shows up at the
last minute with ideas for his accountant, and it's too late to
implement them. A little bit of thought ahead of time can save a
lot of money."

Have I put down in writing what I expect to be
paid?
It's critical to document compensation agreements when you have
to answer to other people -- whether business partners, a board
of directors or investors. "If you're at a board meeting and
someone says, 'You should get 10 to 15 percent of the profits,'
ask them if they mind if you put that in writing," Chapman says.
"Write it down, get it notarized and file it, so there are no
questions later. The clearer you are about money up front, the
better off you will be on the back end."